UK's Recent Economic Performance: Reality Check

There has been a lot of fuss in the media about the UK economy's return to rapid growth. We are told that the UK is experiencing one of the highest rates of growth of any country in the OECD. The Coalition is spinning this as evidence that Austerity has worked.

Yesterday the ONS published a chart which I think puts these claims into context:

Its own description of the UK post-2008 performance is worth quoting in full:

The subsequent economic recovery has been the slowest in post-war history and has also been one of the weakest in the G7 (Figure 1). UK real GDP increased by just 1.2% per annum between 2009 and 2013, the third lowest rate in the G7, and remains 0.6% below its pre-downturn peak while all other major economies have surpassed this milestone, with the exception of Italy. 

The UK economy has grown a measly 6% from it's recessionary low. The US, Canada, Germany and even Japan, have grown by more than 10%. The US economy is now some 7% bigger than it was at the start of the Great Recession, while we are still smaller. Surely the question to the Coalition is not, 'How have you managed to generate such stellar performance since 2013?', but 'Why has the economy performed so badly, by comparison to others, since 2010?'

So when you hear the next story about the UK's economic turnaround, have another look at the chart.

Can We Build A Coalition To Defeat Inequality?

Inequality in wealth and income has slowly grown over recent years until it has become a major political issue of our age. I first became aware of it a few years ago when a friend of mine recommended that I read, 'Winner Take All Politics'. This book, by Jacob S. Hacker & Paul Pierson, first published in 2010, tells the story of How Washington Made the Rich Richer – And Turned Its Back on the Middle Class, to quote its subtitle. We have learned that this is not a phenomenon restricted to America, but one that is common to the emerging countries and much of the developed world, led by the Anglo Saxon economies. The recent publication of French Economist Thomas Piketty's magisterial Capital in the Twenty-First Century has created a stir among academics and commentators that has injected new impetus into the issue. Only last weekend, the Sunday Times led with a story entitled 'Rich double their wealth in five years. Top 1,000 worth record £519bn'.

The story of inequality is not just one about income and wealth. It's also about the collapsing of social and occupational mobility that has gone along with it. As Piketty points out, growing inequality is not just about the tremendous rewards that capitalism can give to a few top CEOs and entrepreneurs. It's becoming more a story about inherited wealth. How can the son or daughter of, say a postal worker, get the same life chances as the offspring of an oligarch, particularly when public services are being cut and many people in power don't see equality of opportunity as important?

In the 1950s my father-in-law, the son of a lorry driver and living in an agricultural labourer's cottage in rural Hertfordshire, won a place to read history at Pembroke College, Cambridge. He went on to become a factory manager for Cadbury's. Have the chances of something similar happening today, some sixty years later, increased substantially? I doubt it.

In 1983, I won a place to read Economics at Cambridge from Brockley County, a comprehensive school in Lewisham. At the time, I attended what was called the Lewisham Sixth Form Centre. This was based in Ladywell on the site of what was then called Lewisham Girls' School. It took pupils from our two schools plus Roger Manwood School in Forest Hill. Also in 1983, a fellow student from this school won a place to read Science at Oxford. These three schools went on to amalgamate to form Crofton School. I don't know how many students from Crofton have won places at Oxbridge, but I suspect that 1983 was something of a high water mark.

When I was at Cambridge, I have no doubt that some found my working class demeanour and Cockney accent irritating. However, no one ever said anything to my face. I think this was because it would have reflected badly on the person doing so, such were the social norms at that time. Recently I heard a state school educated female comedian talking about her first days up at Oxford. She recounted a story of how she had gone along to a social gathering, feeling rather nervous but keen to meet new friends, only to be greeted by a cocksure, 'braying public schoolboy', who bounded up to her and in a loud voice said, 'I hear my parents paid for your education!'. I think she is around twenty years younger than me. Whereas in the 1980s the children of the well-off felt somewhat embarrassed and apologetic about what they considered to be their privileged upbringing, today they seem far less troubled by such sensibilities.

In the last few years, we have seen revolutions in Tunisia and Libya, civil war in Syria and latterly riots in Turkey. It's generally accepted that high and rising inequality played a role in igniting these uprisings. We have also seen violent demonstrations in European periphery countries like Greece and Spain, as people fought back against what they saw as the injustice of the EU's Austerity policy. In June 2011, in an article entitled Society will not suffer huge pay-offs for ever, the former editor of the Daily Mail, Max Hastings, writing in the Financial Times said:

It seems rash to assume that the majority will indefinitely acquiesce in such an extraordinary concentration of wealth, which is even more emphatic in America.

Riots came to the UK a few months later.

Shouldn't we be raising this issue again now that 3 years have passed and inequality has got worse not better? Andrew Sullivan, a prominent US conservative blogger, is doing just that. He is worried that there comes a point where inequality becomes so large that it destabilises society. He thinks they have reached that point in the US.

I think this is is an extremely positive development. This is because if sensible people on the right come to see the reduction of inequality as imperative, if only to preserve civil order, then there is the real possibility that a consensus on this issue can be built. This is vital because I don't think that those of us on the centre left are going to be able to deliver greater equality without the support of many of those on the right. After all, although it was a Labour government that created the Welfare State after WWII, it was doing it in a political environment where it was generally agreed that something of the sort needed to be done, if only to stave off communist revolution.

Is A Housing Bubble Inflating?

Many people are asking if we are experiencing a bubble in house prices in London. The problem with bubbles in asset prices is that they are only normally identified to everyone’s satisfaction after they have burst. In the run up to the bursting of the dotcom bubble at the end of the last century, many were arguing that share valuations that proved ultimately to be irrational froth, were justified on the basis that new technology had created a ‘new normal’. The Internet was seen by these people as an innovation that had created a step change into a new advanced phase of our economic progress. What actually happened at the end of 1999 was a general collapse in dotcom stocks that led to a fall in equity markets across the globe from which it took years for them to recover. The Dow Jones Industrial Average, for example, did not get back to the level it reached in December 1999 until almost the end of 2006.

Here’s my own contribution to the catalogue of London housing market anecdotes. At Christmas, I was talking to my Brother-in-law about the London property market. I said that I thought that our modest 3 bedroom Victorian terraced house in Lee a million. When I said this, I had in mind some time in the middle of this year. He was shocked, comparinGreen, South East London, was probably worth around £450,000, judging by the asking prices for similar houses in the area that were on the market. I said I thought it wouldn’t be long before its value passed halfg as he was this value to house prices in Falmouth where he lives. However, it’s what happened next that is the really shocking thing.

Early in the New Year, a house in our road that is smaller than ours, was put on the market for £500,000. Shortly afterwards two houses very similar to ours in the next street were put on the market for £600,000 each. Both were sold quickly. A month or so ago, a house around the corner from ours that was much smaller also went on the market for £600,000 and was sold. Two 3 bedroom Victorian terraces nearby have just come onto the market. For one, the estate agent is asking for offers over £700,000 and the other has a guide price of £750,000. Could it be possible that my house could have increased in value by maybe as much as £250,000, or over 50%, in about 5 months? Could such a market reasonably avoid being described as ‘overheating’? There certainly seems to be plenty of willing buyers out there, judging by the short period of time property remains on the market and the number of estate agent letters we get through our letterbox, asking if we are thinking of selling.

So it came as no surprise to me when I read that:

New figures show that there has been a 59% increase in working people claiming housing benefit since 2010.

George Eaton writing in the NewStatesman went on to say that, based on new research by the House of Commons library, the additional 386,265 working people claiming housing benefit, had added an extra £4.8bn to this particular welfare bill, pushing the total cost to the taxpayer to over £24.3bn. Remember this is not an additional cost generated by the unemployed or the supposedly work-shy and feckless. Rather, it is working people who are generating increasing welfare claims. And these figures are for the country as a whole, not just London.

These figures have to be clear evidence that pay is not rising in line with rising rents, especially in the private rented sector. Who can be surprised at this if property prices, which determine rents, are rising so rapidly?

Housing benefit is a demand led budget, or part of the government’s annually managed expenditure (AME), to use the official parlance. This means that it is not subject to any cap or restraint. The Treasury will just automatically fund the claims that are made, whatever they add up to. One wonders how big the bill will need to be, (£30bn a year, £40bn?), especially when the increase is being driven by claims made by people in work, before sensible people, regardless of political affiliation, will say something must be wrong with the system. Let’s hope this time comes soon and when it does, that there will be general agreement that part of the solution will be to build more Council housing.

Against Austerity. Been There. Seen It. And Hoping To Get The T-Shirt

During my time as Lewisham's Cabinet Member for Resources, I have taken every opportunity to make the point that the cuts that the Coalition has imposed on local government are part of an Austerity policy that isn't working. I went on about this so much that last year, after my speech on the Council's Budget, my opposite number on the Lib Dem benches, having become rather tired and emotional, pleaded with me to 'change the record'. Shouldn't I take his advice now that in the last quarter the UK economy has grown at an annualised rate of over 3%?

Well, not according to former US Treasury Secretary Larry Summers. In a recent article for the FT entitled, British austerity is no model for the rest of the world, he explains, as others have done, that in fact Austerity was abandoned some time ago. He also says that the UK's recent fast growth can be explained by the greater scope for catching up to pre-crisis levels that exists in the UK. US GDP, for example, is now well above the level it reached at the end of 2007, unlike that of the UK. He also makes the interesting point that the US economy grew at 9% a year for a number of years after the low point of the Depression in 1933. Such high growth was a reflection of the depth of the crisis from which the economy was recovering. As he puts it,

No one has ever taken the pace of the US recovery from the Depression as evidence for the austerity policies that helped to induce it.

By way of illustration, below is the chart I took from Simon Wren-Lewis' blog that I reproduced in a post I wrote back in December entitled, The Return Of Growth – The Celebration Of A Tragedy.

Here you see how far the UK economy's GDP person has fallen below its trend and therefore how much ground it needs to make up to get us back to where we started when the crisis blew up in 2008. You will also see that higher than average growth rates occurred in the UK as the economy recovered from the recessions in the 1980s and 1990s, catching up lost ground to get back to achieving trend growth. The experience of my business is instructive here. During 2009/10, we had the highest growth rate in sales ever. This was because business virtually dried up for a time in 2008/09, so as we recovered from next to nothing our sales growth looked spectacular in percentage terms, even though total volumes were well down on 2007/08 levels. Looking back, my business partner and I didn't celebrate this as a great achievement. What reasonable person would? As Simon Wren-Lewis has pointed out, if all you really want is growth, then you could just close half of the economy's productive capacity down one year, then fire it up the next. Sometimes it's not speed that matters, but total distance travelled in the right direction, as anyone who has taken a wrong turn involving a motorway will know.

In a recent article in the Guardian, the economist Ha-Joon Chang develops this theme. People talk about the 1990s being Japan's 'lost decade', as far as economic growth is concerned. But Ha-Joon points out that in Japan between 1990 and 2000, GDP per person grew by 10.5%. However, in the UK between 2007 and 2013, GDP per person fell by 6.6%. As he says,

This means that, unless the UK economy miraculously grows at around 5% a year for the next four years (factoring in population growth rate of around 0.7% a year), it is going to have a decade that is even more "lost" than Japan's 1990s.

Put another way, real wages in the UK, which saw some the the biggest falls in the OECD, have a long way to rise before they get back to the levels they were at the start of the Great Recession.

So, I have decided to stick to my guns and keep spinning that old 'Anti-Austerity' cracked record. Been there. Seen it. And I have put in a request for the T-shirt for Father's Day.

I'm Sticking My Snout Back In The Trough!

Last week, I returned from a short Easter break to find a letter from the Council waiting for me. It was from the Borough’s Returning Officer informing me that my nomination to be a candidate in May’s local elections had been accepted. If I am re-elected for Labour in New Cross Ward and serve a full term, that will mean that by 2018, I would have been a Councillor continuously for 20 years. This will make me one of the ‘Old Lags’, as a fellow councillor puts it, which I take to be a term of ‘endearment’ used to describe the longest-serving Councillors.

We are constantly reminded that when it comes to popularity and public respect, politicians, like Cardiff City, are struggling at the foot of the table. This is a position we share with estate agents and probably bankers. I am not sure if people had their local councillors in mind when they offered this judgement to the pollsters. I would guess that most people don’t think about the fact that they have a local councillor. By and large people don’t know who their Councillors are. Plus they tend not to vote for them. Turnout in the Deptford constituency in the 2010 General election was 62.1%. Most wards across the Borough struggled to achieve half that in 2006, with some seeing turnout languishing below 25%. Yet following the expenses scandal that engulfed Parliament in 2008 and has simmered away quietly ever since, the public have shown a tendency to tar us all with the same brush. I think many of us have experienced the attitude, particularly when out campaigning, that we are only interested in being elected to the Council to feather our own nest, because the salaries are so high and the allowances so generous.

Whilst doing a bit of de-cluttering at home before the builders came in the other week, I found a copy of The Report of the Independent Panel on The Remuneration of Councillors in London. The panel, chaired by Professor Malcolm Grant, published this report in February 1999, having been asked to look into the issue by the Association of London Government in December 1998. The recommendations were broadly adopted and formed the basis of the Members’ Allowance schemes introduced by London Boroughs and operated to this day. There are a few key points I would draw attention to:

• They found that the average councillor spends over 80 hours a week on the job. 
• They believed this was too much and should be reduced to 60 hours a month. 
• The believed that the first 20 hours that councillors devote to their role should be considered voluntary, to reflect the element of public service involved in being a councillor. They, therefore, thought that this time should not be remunerated. 
• They recommended that the remaining 40 hours should be paid for at the mean London white collar wage. They believed that at the time, this implied a standard backbench allowance of £7,500 per annum. (This has grown over time so that in Lewisham it currently stands at £9,812). 
• Extra allowances should be paid to those councillors with additional responsibilities which require them to spend more time on their duties than allowed for in the 60 hours covered by the basic allowance. 

Lewisham’s scheme of allowances can be seen here. There is a column in the table that records the expenses that Councillors have claimed. In 2012-13 the Mayor and elected Members claimed £655.91. That’s altogether. That’s an average claim of less that £12 per individual. Councillors have also recently been expelled by Eric Pickles from their Council’s pension scheme, bearing in mind that our membership of it was on terms and conditions that were less generous than those which applied to staff.

In short, an ordinary backbench councillor is expected to work for free for at least a third but maybe as much as half of their time, whilst accruing no pension entitlement. Or, to put it another way, Councillors are engaged by the electorate on terms and conditions that, if the Council they serve on sought to apply them to other staff, it would be breaking the law.

I am not trying to drum up sympathy, but I think it is fair to say that most reasonable people would concede that the remuneration of Councillors is not lavish. Those who are privileged enough to be elected on 22 May are likely to be rather more public spirited and less self interested than the prevailing view of politicians in general might suggest. Oink, Oink!

My London Marathon Homily

Yesterday, I ran the London Marathon for the Lavender Trust (donations still being accepted here). I managed to get round the course in 3 hours 54 minutes and 41 seconds – a personal best, or PB as we experienced athletes prefer to say. I have only ever run London and it is a great one to do because it's pretty flat and you have tremendous crowd support, plus it's brilliantly organised. The only downside is that those in the Mass Start run in such vast numbers that every runner does a lot of weaving. This sounds rather trivial until you realise how much it adds to the distance you run to cover the course. This year for me it was an extra 0.4 miles. Two years ago, when I last did it, it was an extra half a mile. The phrase, 'Insult to Injury', does spring to mind, as you stagger up towards Buckingham Palace, look at your Garmin and see you have covered the official course length of 26.2 miles but still have what seems like an eternity to go.

The other great thing about the London Marathon is the results page on its website. Anyone can log on and call up anybody's result. You can see not only their finishing times and where they were placed, but also their times and speeds at 5km intervals and at the halfway point. You can also look at photographs of each runner at various stages on the race. If you look at Ed Balls and me, you will see 2 middle-aged men in agony, running with heads bent over, looking like a couple of tramps scanning the road for discarded cigarette ends. Sadiq Khan on the other hand looks like he is out for a gentle jog around the park, smiling and looking perfectly relaxed. I can't believe those photos of him with his medal are taken at the end. He looks as fresh as a daisy.

You can also search the results by age group and gender, and this is the real purpose of this post. I have run 6 London Marathons now and after every one I, like thousands of other finishers, have logged onto the results page to see their own result and compared it to others they know have taken part. This would include friends and family, celebrities and the elite runners. What has always interested me is how I did relative to the older runners in the field. I think this comes from a desire to keep my own achievements in perspective, but also to give me inspiration and a sense of what is possible in my later years. So, although this year I ran my best time and feel a bit smug because I did a faster time than certain people, this is what I feel I really need to note:

I was beaten by 126 men in the 60-64 age group.

I was beaten by 47 men in the 65-69 age group.

I was beaten by 8 of the 138 men over 70 who completed the course!

I was beaten by 7 women in the 60-64 age group.

I was beaten by 5 women in the 65-69 age group.

I did manage to beat all 33 women over 70 who completed the course.

This year, to beat the fastest man in the 60-64 age group I would have had to knock well over an hour off my time (his actual time was an amazing 2 hrs 48 mins 46 secs) Incredibly, if I had wanted to beat the fastest man over 70, I would have had to run better than 3 03 50! What's more, this was 10 minutes faster than the fastest man in the 65-69 age group (3 13 50). 

That so many older people are achieving such remarkable times in the arduous discipline of marathon running, comes as an instructive counter to the familiar story that rising obesity, lack of fitness and ill health are gripping the nation. You can't run sub 4 hour marathons at any age without prolonged, regular training involving long (13 mile plus) runs. If you run seriously, you will know that up and down the country, running clubs are putting on well organised, competitive running events every weekend over various distances. Each event will normally have hundreds of participants, of all ages and all shapes and sizes. More and more people seem to be catching the running bug.

Perhaps we need to raise our expectations of what we can physically accomplish in our later years and change our view of 'old age'.

The Re-Return Of The Master. Keynesian Stimulus Is Back On The Agenda.

Today, excitement is being generated by the IMF’s announcement that it expects the UK economy to grow by 2.9% this year, the fastest rate of any G7 economy. This is the latest instalment in the, ‘Rejoice! Britain is recovering!’ narrative that has become the received wisdom over the last few months, something that I have observed with increasing bemusement. As a Labour politician, I would be expected to rubbish this message and the Coalition’s attempts to get it across, albeit a rather easy task with so much of the media on their side. There are plenty of opportunities here. For example, this would be fairly modest post recessionary growth, if our experience of previous recessions is anything to go by. Plus much can be said about this growth being generated by rising debt, falling savings rates, and housing market bubbles, together with our worsening trade balance. However, as a businessman and investor (of my own modest pension pot), my self interest lies in being scrupulously objective when assessing what is likely to happen to the economy over the short to medium term. I need the economy to do well for my business to provide me with a living and for my savings to grow and provide me with an income in retirement. But if I do think this recovery is too good to be true, then I need to take action to protect myself. Consequently, I spend a lot of time trying to get behind the headlines and discover the reports that, although freely available, don’t get talked about very much. My hope is that I might stumble across a canary in a coal mine, as I did in 2006-7, and save myself from financial loss.

Over the last few days, I came across a number of such reports. The first was this one on the BBC website, which said that the Chinese government were going to embark on yet another round of fiscal stimulus, as they were so concerned about the slowdown in their economy. Then later the same day the BBC reported that Christine Legarde of the IMF was calling for more fiscal stimulus because she was 'concerned that the global economy could be heading for years of 'sub-par growth''. A few days later, former US Treasury Secretary, Larry Summers, writing a piece in the FT entitled What the world must do to kickstart growth, called for fiscal stimulus in the US to counter slow growth, what he calls 'secular stagnation'.

Can you see a theme emerging here?

The UK economy doesn't exist in a vacuum. Is it rational to be so optimistic about its prospects when it is widely believed that the global economy is so fragile that action by governments is needed to ensure that healthy growth is sustained? Moreover, the likelihood of generating the political will necessary to achieve this in the US and Europe must be pretty slim. This is not least because the Very Serious People, to borrow a phrase from the economist Paul Krugman, at the IMF, ECB, EU, etc, have been enthusiastic proselytisers for Austerity for the last 4 years. Things would need to get very much worse than they are now for such a humiliating about-turn to take place.

The mouth may speak what the heart is full of, but if you want to know what someone really believes, then look at what they do with their money. I am seriously thinking that when it comes to my small nest egg, it may be time to consider following that old stockbroking adage, 'sell in May and go away'.